The UK economy is facing extremely strong headwinds, as shown by the flash reading for recent months’ business activity, which shows a sharp slowdown. The September Purchasing Managers’ Index (PMI) flashed alarming signs at 47.8 and well below expectations. In September, the composite index dropped to a little over that important dividing line of 50. This level is important because it serves as the dividing line between economic expansion and recession. All current indicators point to the fact that the British economy is now growing at a rate of less than 1% and proceeding at a snail’s pace.
Unfortunately, inflation continues to be a thorn in our side, sitting at around 4%. This high inflation rate increases the urgency for the government to responsibly manage public finances. The Office for Budget Responsibility (OBR) has responded to these extraordinary circumstances. Chipping in to make the financial picture more complicated, they’ve downgraded the UK’s productivity forecasts.
Taken together with the recent inflationary environment, this has led to a claimed public finance black hole of £30 billion. This gap further complicates the already difficult task that lawmakers face when trying to balance the budget. No wonder current levels of the UK’s sterling currency, at about 1.25 US dollars per pound, indicate a fairly pessimistic future outlook for the UK economy right now.
Worries are growing about a new Autumn Budget that has raised alarmist hopes among some economists and investors. The gilt market is likely to bear the brunt of these fears and tumble again. This unexpected decline would further raise government borrowing costs and threaten broader financial stability.
Today, our experts and analysts shine a light on the threat of darkened business corridors. They caution that high, persistent inflation complicates risks to the broader economic outlook. Striking the right balance between encouraging economic growth and keeping inflation in check will be a fine line to walk in the months ahead.